Since the first weeks of August, 2009, I have stated the following in every weekly summary on equity market sentiment: "Investor sentiment remains extremely bullish.
There is an upward bias until the extremes in bullish sentiment are unwound." I also mentioned early on that "there will be a bid under the market, and it
will be tough to short or bet against this market for the foreseeable
future." I would say that about characterizes the US equity
markets over the past 2 months. Now, however, I am changing my tune.
I want to state that equities are for renting not owning at this juncture. I am not calling for a market top, but prices should trade more in a range, and if you intend to play on the long side, it will be important to maintain your discipline (for risk reasons) and buy at the lows of that trading range and sell at the highs to extract any profits from this market. The upward bias still remains as long as investor sentiment is still extremely bullish, but there is probably greater risk of a market down draft now than in past weeks. Thus new equity purchases are for renting not owning; protecting profits on existing positions is essential.
Several observations are worth noting that might keep an upward bias under this market as we have seen over the past 2 months. One, the "Dumb Money" indicator is still bullish to an extreme degree, and normally, such extremes in sentiment need to be unwound before seeing the market lower; I am not calling for a lower market, I am just stating that gains from this point will be difficult to hold on to. Two, the Rydex market timers are bearish on equities (more below), and it is unlikely for the market to roll over with these investors (as a representative sample of all investors) nailing the market top. Honestly, I don't see a market top, and a melt up is possible as short covering provides the market fuel.
Nonetheless and for now, I have to whistle a different tune. I see risk rising.
The "Dumb Money" indicator is shown in figure 1. The "Dumb Money" indicator looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investor Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio. The "Dumb Money" indicator remains extremely bullish.
Figure 1. "Dumb Money" Indicator/ weekly
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The "Smart Money" indicator is shown in figure 2. The "smart money" indicator is a composite of the following data: 1) public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders. The "smart money" is neutral.
Figure 2. "Smart Money" Indicator/ weekly
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Company insiders continue to sell shares to an
extreme degree. See figure 3, a weekly chart of the S&P500 with the InsiderScore "entire
market" value in the lower panel. From the InsiderScore report: "Transactional
volume slowed as trading windows continued to close ahead of Q3 2009 earnings
announcement. Those insiders who were free to conduct transactions showed a
distinct sell bias as our Weekly Score was in negative territory for the
fourteenth-straight week and companies with selling outnumbered companies with
buying for the twelfth-consecutive week."
Figure 3. InsiderScore Entire Market/ weekly

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Figure 4 is a daily chart of the S&P500 with the amount of assets in the Rydex bullish and leveraged funds versus the amount of assets in the leveraged and bearish funds. Not only do we get to see what direction these market timers think the market will go, but we also get to see how much conviction (i.e., leverage) they have in their beliefs. Typically, we want to bet against the Rydex market timer even though they only represent a small sample of the overall market. As of Friday's close, the assets in the bearish and leveraged funds were greater than the bullish and leveraged; referring to figure 4, this would put the red line greater than green line.
On a side note, it is interesting how these investors got less bullish all last week as prices in the major indices rose. In fact, $250 million left the bullish and leveraged camp after Monday's rally; I guess these bulls had enough of a drubbing on the prior Thursday and Friday when the S&P500 lost about 30 points; they were happy to get out. After Monday, the market rose another 30 points.
Figure 4. Rydex Bullish and Leveraged v. Bearish and Leveraged/ daily
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The last time we had the Rydex market timers
betting against the market when it was near its highs was back on September 13.
They were bearish for 4 days and the S&P500 rose 1.55% before these bears
threw in the towel. Then as now I will state: "don't
become fodder for the bulls".
In summary, it would seem very little has changed in the sentiment picture over the past weeks. The "Dumb Money" indicator is extremely bullish; the "Smart Money" is neutral; insiders are net sellers; and the Rydex timers seem to be on the wrong side of the trend. But even these trends can become exhausted over time and they won't persist forever. In the absence of a melt up, meaningfully higher prices will not be achieved until we see lower prices first. Therefore, stocks are for renting not owning.
I wonder if anyone has done any real statistical studies on how useful sentiment is as an indicator of market direction. The random walkers would say it is useless. Sure there have been cases where sentiment was bullish and then the market went down, but there have also been many cases where it went on up. Similarly when sentiment was bearish.
There is a whole mythos about "sentiment" out there, and "technicals", and "smart" and "dumb" money. I think it's a load of crap. Plenty of "smart" money has come to grief and plenty of "dumb" money has gone on to make fortunes over the years. Just chance. Random events. Put your money in index funds and forget it. You'll never be able to second guess everyone else reliably enough to make any real money based on voodoo sentiment BS.
Not trying to predict but skew the odds in my favor; think card counting in a game of blackjack; we bet big with a lot face cards left in the deck; even if the deck is in my favor I still cannot predict what card is going to be next, but over time things should roll in my favor
same thing here: we bet big against the consensus because well over time it works!
See this link:LINK
so few weeks ago you stated "you is left to buy" cause the rydex bullish was too high. So that was negative. Now rydex bearish is rising - and thats negative too? Pick a side of the stick and hold on to it.
Anon:
I did state in the article that typically we want to bet against the Rydex traders and that is no different; however, if we can think more than 2 days ahead it is likely that these bearish bets will have been losing bets--in other words, the Rydex trader tends to flip daily. This still doesn't change the analysis: gains going forward will be difficult to hold on to. But go ahead and buy at the highs!!
The copper chart continues to be a good economic barometer.
Overall US dollar sentiment is extremely bearish, which from a
contrarian perspective is actually bullish.
Will USD rally when bear market rally ends ?
http://www.zerohedge.com/forum/market-outlook-0
Conspiracy theory du jour:
Obama needs a rising market, to have the “political capital” necessary to pass nationalized healthcare. Once it passes, the PPT can take a vacation…
(Pretty “technical”, eh? :-)
+1
Why wouldnt the markets go higher than they were in 2007? The weaker companies have been pushed out of the major indexes and replaced with stronger performers. Dollar isnt getting any stronger. And the government has shown that they wont let companies fail? When you buy a stock now 0 is no longer the bottom. The bottom has been raised. We are protected, we have less risk. If we liked it in 2007 with risk we must love it now with less risk dont you think?
Every time I hear nonsense like that how it is DIFFERENT THIS TIME, THE MARKET TANKS HARD!
I will take the other side of your trade sir.
Why wouldnt the markets go higher than they were in 2007? The weaker companies have been pushed out of the major indexes and replaced with stronger performers. Dollar isnt getting any stronger. And the government has shown that they wont let companies fail? When you buy a stock now 0 is no longer the bottom. The bottom has been raised. We are protected, we have less risk. If we liked it in 2007 with risk we must love it now with less risk dont you think?
The statement that "stocks are for renting not owning" is not exactly news. Can't think of any time in the last 30 years that stocks weren't for renting.
It's amazing how brazenly you take these concepts from sentimenTrader.com. Right down to the names of your supposedly "proprietary" measures.
There is overlap with Sentiment Trader because the data we use is similar -- that is it. The difference that I have brought to the table (starting about 5 years ago) was extensive back testing of the indicator(s). This was not to curve fit but to understand the price cycle or what I call the cycle of fear and greed. I have taken to the time- which so few have done - to chase down the data and explore the significance of such data.
TTT, you are a sentiment trader I see, whereas I like to follow supply/demand & patterns. May I suggest to you that you incorporate volume into your analysis? I think SPX has potential to 1235 with resistance around 1125 as is impossible as that might sound.Pullbacks & correctives are always possible at any price level. If one occurs here, it will eventually clarify the pattern.
http://tinyurl.com/ygnwmes
Keep these posts coming!
Love it.